Actress Gul Panag (left) and Lenovo's Amar Babu are seen in silhouette at an event in India in 2010.

Actress Gul Panag (left) and Lenovo's Amar Babu are seen in silhouette at an event in India in 2010.

Photo: Dibyangshu Sarkar, AFP/Getty Images

China's Lenovo finds treasure in other companies' castoffs

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This year, Lenovo went shopping. The Chinese maker of computers and smartphones said in late January that it was buying Motorola's mobile phone business from Google for $2.9 billion, less than a week after announcing the $2.3 billion purchase of IBM's low-end server business. If the two deals receive U.S. government approval, Lenovo will have more than tripled in revenue, going to almost $50 billion from $15 billion five years ago.

Even before those acquisitions, the company's expansion had been striking. Last year, it became the top-selling personal-computer maker in the world. Four years after introducing its first smartphone, the LePhone, it's fourth in that business globally - and with Motorola it will become third, behind Samsung and Apple. Ten years ago, Lenovo sold only one product, PCs, in one country, China. Now it sells PCs, phones, tablets and servers in more than 160 countries. It has 46,000 employees. And yet, in the U.S. and Europe - where many of its users are managers and salespeople with corporate-issue Lenovo ThinkPads - the name barely registers.

Unglamorous approach

Partly this is because Lenovo, for much of its history, has focused its efforts on China, but it's also because under CEO Yang Yuanqing, Lenovo has taken an unglamorous approach to empire building. Unlike Apple, Samsung, Hewlett-Packard, and most other major manufacturers, Lenovo builds much of its equipment in its own low-cost factories. And over the past decade, the company has grown into a global giant by cannily scavenging other companies' castoffs.

"Not only can we keep the manufacturing profit, but also we can be more innovative than the other PC companies," Yang said. "That's why over the past five years we beat every PC company in the world."

Google is dumping Motorola, which it purchased for $12.5 billion in 2012 primarily to get its patent portfolio, and getting itself out of the awkward position of competing against the phone makers that use its Android operating system.

IBM's sale of its server unit is part of a decade-old transition from hardware manufacturing to the higher-margin businesses of consulting and software services. That shift started when IBM sold its PC division in 2005, also to Lenovo, back when the company was unknown even in corporate America's purchasing departments.

Undervalued assets

It's the consumer electronics version of the Oakland Athletics' Moneyball strategy: Instead of ballplayers, Lenovo hunts undervalued businesses in sectors others are desperate to escape. "The IBM PC business was seen by IBM as a troubled asset," said Roger Kay, a technology market analyst, "and Lenovo turned it around and made it the most profitable PC business in the world."

The company is looking to become a force in the still-growing business of mobile. Motorola gives Lenovo an infusion of talent, access to a bundle of intellectual property - Google is keeping the patents but will license them to Lenovo royalty-free - and a brand that, despite losing more than $1 billion last year, remains one of the best-known in phones.

Jumping into mobile also puts Lenovo in unfamiliar territory: a dynamic market that's contested by the biggest powers in tech.

"For Lenovo, the competition has shifted from HP and Acer and Dell to Samsung and Apple," says William Grabe, a member of the company's board and a former IBM executive. "Lenovo wants to be a $100 billion company, and you're not going to get there just by improving PCs or even servers."

Yang is among China's biggest business celebrities. He and many of his top lieutenants have offices both in Beijing and in North Carolina, an arrangement that gives some support to the company's constantly reiterated insistence that it's not a Chinese company, but a global one. Everyone at Lenovo is at pains to point out that the official language is English and that there are seven nationalities among the 10 highest-ranking executives. "Not that there's anything wrong with being a Chinese company," said David Roman, the company's Australian chief marketing officer. "But just in terms of how we're structured ... we're not really a Chinese company."

In 1989, when Yang joined the company as a salesman, it was called Legend. It was 5 years old, and capitalism had been legal in China for barely a decade.

In 1990, after building up a business selling foreign-made PCs in China, the company started making its own. Yang was asked to head Legend's PC division. The young executive quickly shocked the company by introducing performance-based bonuses, firing people, and insisting that managers be addressed by their given names. He also began carpeting China with franchised Legend retail stores. In 1997, the company, by then publicly traded in Hong Kong, became the top PC maker in China.

When Yang became CEO in 2001, he immediately expanded the company's reach. "Just focusing on China was not enough," he said. "We had to become global players." Yang changed the company name to Lenovo. The question was, what did the renamed company have to offer consumers outside China? Yang's answer was to buy IBM's PC business.

Stepping aside

Yang stepped aside as CEO and chose an American to succeed him: Stephen Ward, head of IBM's Personal Systems Group. Yang became chairman, moved to North Carolina, hired an English tutor, and put himself on a steady diet of cable news to get an ear for the idioms.

Ward left in 2005. His replacement, Dell executive William Amelio, cut costs and streamlined the supply chain.

Lenovo was hit hard by the global economic crisis, and Yang returned to run the company in 2009. His resumption of CEO duties was widely seen by analysts as a retrenchment, but the company was also laying the foundation for a different sort of expansion.

"We had only focused on our existing business and tried to squeeze every penny to improve profitability. We had ignored developing new business," Yang said. Amelio, in an effort to focus on PCs, had sold Lenovo's mobile device division to a group of private equity firms in 2008 for $100 million. Yang bought it back for $200 million and started pouring resources into it.

Last fall, American actor and tech investor Ashton Kutcher signed on as a spokesman and design consultant. "The first time I went to China, I was able to walk around and nobody knew who I was," Kutcher said. "Since my collaboration with Lenovo, that's not been the case."

Lenovo is perennially the No. 1 PC maker in China and is now No. 2 in smartphones after Samsung.

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